13 June 2008 - Restrictions on rice exports recently witnessed, primarily in Asia, have caused nervous excitement in the world rice market. “Rice is Asia's 'bread and butter'. Governments in Asia have always been protective of this industry as it is a main staple for most countries here in the region,” says Brady Sidwell of Rabobank's Food & Agribusiness Research and Advisory (FAR) team in Asia.
In short supply
When rice supplies are short as seen from the record low stock levels globally, countries have to make a decision to either import more and/or export less. “In recent months, inflationary fears which have seen rice prices treble, have resulted in a tightening of borders through a mixed approach of reduced import tariffs and elevated taxes on exports of rice in the likes of Thailand, China, Vietnam and India,” says Sidwell.
Controlling rice stocks
“Governments across Asia are trying to protect and control their rice stocks in the short term. However, when hoarding and restrictions start, import dependent countries like the Philippines, the world’s largest importer, take actions which can exacerbate the situation in the longer term. Some Asian countries, such as Malaysia and Indonesia, have even resorted to fixing rice prices,” says Sidwell. “The record world rice crop this year should help to relieve upward pressure on rice prices though trade barriers could prove troublesome to the key import markets.”
Trade restrictions
Although export trade restrictions are being put in place to rebuild rice stocks and provide some reassurance for food security, the exercise is toying with price dynamics to the detriment of farmers, processors and traders in the restricted areas. “Where the rest of the world’s rice farmers may make money this year with rice crops, Asian farmers may have to settle for lower prices if export restrictions continue,” says Sidwell.
Lowering price to farmers
“In some Asian countries, rice processors and traders have been blocked from selling rice to other countries. If traders can no longer export rice to Europe, for example, they have to sell it locally, which often does not get the same high price. Thus, local processors and traders have less incentive to pay farmers more despite a rising market price for rice,” explains Sidwell.
Driving prices even higher
The Rabo analyst continues, “If you pay the farmer less amid rising costs for inputs, producers have little or no incentive to continue planting this crop if unable to capture the return from higher market prices. Thus, the rational response from farmers will be to plant a crop where expected margins are highest,” says Sidwell. “Price and trade restrictions may, therefore, result in crop substitution away from rice. Consequently, negative supply side effects from fewer planted acres could continue, driving rice prices even higher,” says the food and agri analyst.
“As the old adage rings, the best cure for higher prices, are higher prices. When prices are high, then farmers plant more, and a rebalancing of supply and demand is achieved. It’s simple economics which trade restrictions can disrupt,” notes Sidwell.